Real Estate and Land Use E-Newsletter

The Highs and Lows of Marijuana Dispensary Tenants by Damien Hall

The State of Oregon has legalized the sale of medical marijuana from retail dispensaries, and leasing inquiries for dispensaries are crossing the desk of commercial property owners more and more frequently. In determining whether to lease space to a dispensary, a landlord is faced with a bevy of legal considerations that are unique to these potential tenants.

The complexity comes from the often inconsistent interplay of federal, state, and local regulation of dispensaries. All marijuana, medical or otherwise, remains a controlled substance under federal law. In contrast, Oregon law will, as of March 3rd, allow for operation of dispensaries, subject to licensing and other requirements. To further muddy the legal waters, numerous Oregon cities have adopted regulations in the form of business licensing, zoning, and moratoria, that prohibit dispensaries.

So what is a building owner to do?

First, understand that as long as federal drug laws remain the same, there will always be some risk that a dispensary tenant could be shut down by law enforcement. That risk is somewhat mitigated by U.S. Department of Justice guidance that when a dispensary is operated in compliance with state law, federal prosecution of marijuana use and distribution is less likely to occur. Even if it were possible for a landlord to ensure that a dispensary tenant strictly adheres to state law, such guidance is not a sure thing and can change with a new administration in 2016; which should be considered when entering into long term leases.

Whether a dispensary is the right fit for a location will depend on typical factors including the market for the space and tenant mix in the building. However, building owners should consider both the risk associated with allowing distribution of a federally-controlled substance, and the risk that a local government’s decision could shut down dispensary operations.

If, after such considerations a dispensary tenant makes sense, a building owner should become familiar with the state’s requirements for registration of dispensaries. Inclusion of terms in the lease that mandate the tenant to provide the owner with documentation of compliance with all state requirements will provide some assurance that the tenant is following state law. Some of the requirements, such as secured video monitoring of the premises, may become part of lease negotiations as well. Finally, know your local code: the legislature passed SB 1531 in March, which allows any Oregon city to pass a moratorium on dispensaries until May 2015. The City of Portland has not taken any action to prohibit dispensaries, but various jurisdictions have passed moratoria, or regulations effectively prohibiting dispensaries, and still more are currently considering doing so. Those jurisdictions in the Portland Metro Area include: Beaverton, Fairview, Gladstone, Gresham, Happy Valley, Hillsboro, Sherwood, Tigard, Tualatin, and Wood Village.

Congrats to Beam Development on Eastside Exchange

Once slated for demolition, the 100,000 square foot building is the lone existing structure at the Burnside Bridgehead site. Beam saw enormous potential in what others had considered a teardown, especially based on their experience redeveloping other historic warehouses in the district, such as the Eastbank and Olympic Mills Commerce Centers.

Tenants, including Cascade Energy, the Technology Association of Oregon, and creative agency Sincerely Truman, enjoy the Exchange’s open character and minimalistic renovation, which showcase the building’s old-growth timbers and other historic features. The redevelopment included a major seismic retrofit, new windows, new mechanical, electrical, and plumbing systems, a roof deck, and ample indoor bike parking, showers, and locker rooms. Brad Miller of Ball Janik LLP assisted with the development and leasing of this project.

“We have been very fortunate to come to market at the perfect time,” says Beam’s Jonathan Malsin, “with the economy coming back strong, and very little new product like this coming online in the Central Eastside. Both the pace of the lease-up, as well as the rents we are seeing, have exceeded our projections.”

Loan Documentation: Considerations for Borrowers

With the recovery of the financial and real estate markets, loans from banks, insurance companies and conduit lenders are again obtainable. Although borrowers are not able to make many changes to the loan documents documenting these loans, there are a number of changes that a borrower should consider requesting, including: (i) adding the concept that the failure of a lender to respond to an approval request within a specified period of time constitutes a deemed approval by the lender of such approval request, (ii) if a lender has a remedy that is triggered by an event of default and such event of default is cured before the exercise by the lender of such remedy, the lender no longer has the right to exercise such remedy, (iii) if there are any deposits or reserves held by the lender under the loan, interest on such deposits or reserves are for the benefit of the borrower, (iv) if reserves are required for a loan, placing caps on the amount of the reserves required, and if a reserve is tied to a specific risk (such as the renewal of a major lease), providing for a release of such reserve in whole or in part as such risk is dealt with the borrower, and (v) limiting the leases that a lender has the right to review to what are truly only “major lease.”

Urban Growth Boundary (UGB) Update by Damien Hall

Since the last edition of Briefly Stated, both the Court of Appeals and the State Legislature made significant decisions that have changed Portland Metro UGB.

First, the Court of Appeals issued its opinion in Barkers Five LLC v. LCDC which affirmed in some part and reversed in large part Metro’s June, 2010 decision, and LCDC’s approval of the Metro decision, regarding “urban reserves” and “rural reserves.” Second, the State Legislature enacted HB 4078 which, in effect, changed certain key parts of the Court’s decision. It also reflects the Legislature’s frustration with the multi-year battles over land use issues and their never-ending litigation surrounding UGB amendments. The outcome of the two decisions is an additional 1,100 acres of urban land in Washington County that is available for employment uses, a potentially streamlined future UGB reserves designation process, and various political handouts.

The Barkers Five Court opinion invalidated the process that Washington County used to determine the location of urban and rural reserves, the land outside the UGB that is slated as next in line to come into the UGB (urban reserves), or to be kept as rural for 50 years (rural reserves). The decision sent Washington County back to the drawing board to reassess its reserves, and cast doubt as to whether the region could effectively amend the UGB in response to the growing demand for residential and employment land.

These issues resonated with the Legislature, which passed HB 4078 - the bill that became known as the "Land Use Grand Bargain." The Grand Bargain balances the inclusion of additional urban acreage in the North Hillsboro area, in exchange for corresponding reductions to the area proposed as urban reserve and additional designation of rural reserve land, including the Helvetia area. The approximate numbers look like this.

HB 4078 area adjustments:

Net change to UGB:

+1,150 acres

Net change to Urban Reserves:

-3,150 acres

Net change to Rural Reserves:

+2,750 acres

Net change to Undesignated:

-740 acres

At its core, the Grand Bargain results in an increased employment land supply that is available immediately, and a decreased amount of acreage for Washington County UGB expansion over the next 50 years. The rest of the region remains on the same footing. The wisdom of sacrificing future acreage for short term supply can be questioned by both supporters of industrial development and farmland protection, but that misses the point recognized by the Legislature which is that some land is better than perpetual fighting in the courts.

Any information obtained from this correspondence is strictly informational and not to be construed as legal opinion or advice by Ball Janik LLP or its attorneys on specific facts or circumstances nor a solicitation of legal business.